Feb. 6 (Bloomberg) -- The U.S. foreclosure crisis has risen
to new heights.

Atlanta’s 55-story Bank of America Plaza, the tallest tower
in the Southeast, is set to be sold at an open outcry auction on
the steps of the Fulton County Courthouse tomorrow after
landlord BentleyForbes missed mortgage payments. It bought the
skyscraper in 2006 for $436 million from Bank of America Corp.
and Cousins Properties Inc. in the city’s biggest property deal.

Since the property market peaked a year later, the 1.25
million-square-foot (116,000-square-meter) building has lost 54
percent of its value, Bank of America, its largest tenant, has
reduced space and bond investors who helped finance the purchase
are on the hook for losses, according to data compiled by
Bloomberg.

“It’s a fine building, a beautiful building, and still
very much a landmark,” said Kirk Diamond, senior managing
director at broker Cassidy Turley, in Atlanta. “It just needs
to be recapitalized and written down to a market level to be
able to compete effectively.”

Atlanta’s office market is a victim of overbuilding and
inflated real-estate prices fueled by issuance of commercial
mortgage backed securities that peaked in the U.S. at $232
billion in 2007. While investor demand for property debt surged
last month by the most since March 2010 as the economy
strengthened, borrowers in cities such as Atlanta outside the
prime U.S. office markets of New York, Los Angeles, Washington
and Boston are struggling to refinance as about $5.8 billion of
five-year office loans bundled inside CMBS matures.

Distressed Assets

“We’re hitting a tremendous amount of that debt coming
due,” William Yowell, a vice chairman with CBRE Group Inc. in
Atlanta, said in a telephone interview. That will cause “more
distressed assets that come to market this year” and may lower
the price per square foot on buildings, he said.

While lenders may face more losses, real estate investment
trusts are seeking to take advantage by purchasing buildings,
said Jim Sullivan, managing director of REIT research at Newport
Beach, California-based Green Street Advisors.

The Bloomberg Office REIT Index gained 10.9 percent this
year compared with a 8.5 percent gain in the Bloomberg REIT
Index. That followed a decline of 3.9 percent last year.

‘Man In Full’

Atlanta’s boom and bust property market set the stage for
Tom Wolfe’s 1998 novel ‘A Man in Full’’ that portrayed an ego-driven Southerner who builds an empire of office complexes.

It’s now squarely in the bust category with the highest
rate of late payments for loans on offices bundled into bonds
among the largest U.S. metropolitan areas, at 25.3 percent,
according to data compiled by Bloomberg. That’s increased from
10.4 percent a year ago and is more than triple the 7 percent
national rate. The rate for payments 60 days late or more was
higher than Cleveland at 23.4 percent and Phoenix at 23.3
percent, the data show.

The $363 million Bank of America Plaza loan became
delinquent in December after BentleyForbes stopped making
payments, pushing the overall delinquency rate on CMBS debt to
9.32 percent, according to Moody’s Investors Service. The loan
was partly packaged inside JPMCC 2006-LDP9, which was downgraded
by Fitch Ratings in December because of expected losses.

C. Frederick Wehba II, president of Los-Angeles based real
estate investor BentleyForbes, didn’t return calls. Bud Perrone,
a spokesman for LNR Partners, the special servicer tasked with
handling the loan, declined to comment.

Gone With the Wind

The 1,023-foot building would be the tallest in the U.S. to
be foreclosed on since the financial markets froze in 2007,
according to Real Capital Analytics Inc., a New York-based
property research company. Boston’s John Hancock Tower, New
England’s tallest skyscraper at 790 feet, was sold at auction in
2009 after its owner defaulted on debt they used to buy it three
years earlier.

The Bank of America tower is a block down Peachtree Street
from Atlanta’s historic Fox Theatre, where “Gone with the
Wind” began showing after it premiered in 1939. Its façade is
covered in granite reminiscent of red Georgia clay, topped by a
lighted steel frame pyramid and a 90-foot spire that’s visible
from miles away. Purple, orange and white pansies line the brick
walkways leading to the entrances.

The building is situated between Atlanta’s downtown and
Midtown areas. A block down Peachtree Street is Gladys Knight’s
Chicken and Waffles restaurant, where the “Midnight Train”
plate of fried chicken wings and a malted waffle costs $10.50,
and there’s a pita restaurant and diner on the next block.

Market Tumbled

BentleyForbes bought the tower from a joint venture of
Charlotte, North Carolina-based Bank of America and Cousins
Properties, an Atlanta-based real estate investment trust. In
2007, a year after the sale U.S. office property transactions
peaked at more than $200 billion, Real Capital data show.

The market tumbled the following year as lenders restricted
borrowing and the economy fell further into recession. Wall
Street banks arranged about $28 billion of commercial mortgage
debt securities last year, compared with $11.5 billion in 2010,
Bloomberg data show.

Investor demand for the securities has climbed this year as
the U.S. jobless rate fell in January to 8.3 percent, the lowest
level in three years, and Europe’s sovereign debt crisis abated.

The extra yield investors demand to hold top-ranked
commercial-mortgage bonds rather than Treasuries declined 45
basis points since December to 216 basis points, or 2.16
percentage points, according to the Barclays Capital CMBS AAA
Super Duper Index. That’s the narrowest spread since July after
the fastest contraction last month in almost two years.

Trophy Towers

Lenders have also stepped up competition to lend to New
York trophy towers with $930 million refinanced on two
skyscrapers since the middle of December; Vornado Realty Trust’s
Park Avenue tower and Sheldon Solow’s 9 West 57th Street, home
to Chanel SA and KKR & Co.

Even with improvements, only 27 percent of loans originated
in 2007 at the peak of the market that had so-called balloon
maturities in January “managed to pay off,” according to Trepp
LLC, a mortgage data provider. Five-year office loans are $5.8
billion of the overall $55 billion of CMBS loans maturing in
2012, Standard & Poor’s said in a December report,

Prices in cities such as Atlanta and Phoenix are well below
their highs, Peter DiCorpo, president of CBRE Global Investors
U.S. managed accounts group, said in a telephone interview.

Atlanta office rents are down about 10 percent to $18.27 a
square foot since the first quarter of 2008 and the market has a
16.7 percent vacancy rate, according to CoStar Group Inc.’s
Property and Portfolio Research. The New York area’s vacancy
rate was 8.4 percent in the fourth quarter with an average rent
of $36.46 a square foot.

‘Peak Levels’

They’re “going to struggle to get back to peak levels
within the next five years,” Jeff Myers, a real estate
economist at CoStar, said in a telephone interview from Boston.

The Plaza was appraised in March at $202 million, Bloomberg
data show. Its biggest tenant, Bank of America, said it would
reduce its space of net rentable areas to 15 percent from 30
percent and the lease rate will drop by half, Fitch said in the
December report. Accounting firm Ernst & Young, which leased
196,000 square feet of space, moved in 2007 a few blocks south
to the then-newly built Allen Plaza complex, according to data
compiled by commercial real estate brokerage Colliers
International.

An investor buying the Bank of America Plaza property will
have to be patient, said Julian Diaz, chair of the real estate
department at Georgia State University in Atlanta, said in a
telephone interview.

‘Staying Power’

“This is an opportunity for someone with staying power to
get an asset they’re basically buying at the bottom,” Diaz
said. “If they’ve got the staying power this is going to be a
very valuable asset when the market turns back around.”

Real estate investment trusts have the capital to buy
distressed properties and have been looking for deals, Green
Street’s Sullivan said in a telephone interview.

“The REITs are well positioned financially and
operationally to take advantage of more of these deals if they
come.”

Cousins, the Atlanta-based REIT, bought Promenade Two, an
Atlanta building in November that was 58 percent leased when it
purchased it after its anchor tenant moved out.

The price for the 774,000 square foot building was $134.7
million, or about $174 per square foot. The replacement cost is
about $315 to $320 a square foot, Larry Gellerstedt, Cousins’
chief executive officer, wrote in an e-mail.

In the early morning hours, swaths of the Bank of America
Plaza’s middle and lower sections remain unlit in a testament to
its declining occupancy rate.

“You look across the street and you can just see all those
vacant floors,” said Lionel Alexander, 56, a bridge design
engineer for the Georgia Department of Transportation, who works
in an office building across the street. “It’s really sad.
Hopefully they can fill it back up someday.”